Equity/ Stock-based compensation is a method by which corporations use options to buy stock at subsidized/ no cost usually at a future date to incentivize, retain and reward their employees/ advisors.

1. the definitive guide to
STOCK BASED COMPENSATION
FOR EMPLOYEES

2. Stock based compensations
for your organization
Disclaimer: This paper is a property and copyright of Prequate™. No reader should act on the basis of any statement contained herein
without seeking adequate professional advice. The authors and the company expressly disclaim all and any liability to any person who has
read this paper, or otherwise, in respect of anything, and of consequences of anything done, or omitted to be done by any such person in
reliance merely upon the contents of this paper. The intention of this Whitepaper is to educate and is not meant to be exhaustive or
prescriptive either. Their sole intention is to outline the facts and guide decision-making. Discretion is advised.
Further this document has been designed to collate all the relevant information about the subject matter and allow you to further read
based on your interests. We thank all the contributors whose information and links we have shared in each page. This document intends to
be the front face on the topic more than a research paper.
Mar 2019

3. To win in the marketplace
you must first win in
the workplace.
- Doug Conant
Former President & CEO, Campbell Soup Company

4. 1.4
X
5.2
1.9
X
1.6
X
3.4 X
+57%
+92%
X
+62%
Average Tenure
in the company
in years
Non-ESOP
ESOP
Non-ESOP
ESOP
S&P500
ESOP
Average
Household
Income
Average
Returns
2002-12
X
+36%
Non-ESOP
ESOPCompanies
Increased
Growth
over 10 years

5. WHATISANESOP
Equity/ Stock-based compensation
is a method by which corporations
use options to buy stock at
subsidized/ no cost usually at a
future date to incentivize, retain
and reward their employees/
advisors.
In order to use the method,
you need to be registered as a
corporation with shares or
similar stock units.
Defines the coverage
of employee levels of
the plan, e.g., senior
management only in
this case.
Usually priced so that
employees can own
stock units at a price
lower than fair/
traded market value
when they are
eligible to buy.
But only to company’s/ parent
company’s/ subsidiary’s/ holding
company’s employees.
Incentivize. motivate or encourage to do something
Retain. keep someone engaged in one’s service
Reward. give something in recognition of service,
efforts or achievements

6. GOODFOREMPLOYEES
of companies that said ESOP
deployment benefitted the
company
of companies that said their
company’s stock value increased on
external appraisals
said profitability
increased 69%
93%
83%
of companies said it positively
impacted employee morale and on-
job performance
77%
said revenue
increased 78%
2015 ESOP
Survey, EO
Foundation
Employee Ownership
Foundation's 21st Annual
Economic Survey
AMA
Blog, Jerry L
Ripperger
How Employee Ownership
Benefits Executives, Companies,
and Employees
Correlates of
Employee
Satisfaction
Journal of Applied Psychology,
study by KJ Klein & RJ Hall,
University of Maryland
Less
likely to
leave
13%
24%
% of employees considering seeking employment elsewhere
Conventionally held
Companies with ESOP plans
Earn
more
wages
$40,000
$30,000
median pay from wages across industries and levels
Conventionally held
Companies with ESOP plans
Accrue
more
wealth
$28,500
$14,831
median household wealth of employees across industries
Conventionally held
Companies with ESOP plans
Receive
more
benefits
69%
39%
employees provided with other benefits additionally
Conventionally held
Companies with ESOP plans
2018 NCEO
Annual
Survey
National Center for Employee
Ownership Survey read with
2018 Update
2018 ESOP
Economic
Performance
Performance of ESOPs in
organizations by BKD, CPAs &
Advisors
Statistical
Profile on
EOs
National Center for Employee
Ownership with Department of
Labor for 2015

7. MORE THAN ONE WAY
EQUITY AWARDS MIMIC
Employee Stock Option Plan (ESOP), Incentive
Stock Options (ISO), Employee Stock Purchase
Plans (ESPP), Non-Qualified Stock Options
(NQSO/ NSO)
Restricted Stock Units (RSU), Unrestricted Stock
Unit (USU), Common Stock Alternative (CSE)
Phantom Stocks, Stock Appreciation Rights
(SAR), Profit Pool, Strategic Deferred
Compensation Plans, Profit Unit Plan (PUP)
RESOURCES
Allows employees to become share
holders at a future date and at a pre-
determined price, usually lower than the
fair market price.
Allows employees to become share
holders today but applies restrictions on
the transferability or ownership to
safeguard company interests.
Mimics equity interest but without
altering or modifying the cap table to
incentivise employees for current and
future performance.
I want my employees to be
owners like me.
Investors would want me to
have ESOPs to retain talent.
We are expecting to go public/
get acquired someday soon.
I want my employees to have a
share of our success subject to...
Flexibility to operate and option
to buy-back is paramount.
I need to reserve certain rights
as my investor wants them.
I want them to partake in
liquidity events.
I believe their contributions are
specific to certain areas mostly.
Stock dilution may impact me
negatively in this scenario.
Investopedia
ISOs
Definitions of key phrases relating to
the meaning, statutes, advantages &
disadvantages of concepts
Investopedia
NQSOs
Definitions of key phrases relating to
the meaning, statutes, advantages &
disadvantages of concepts
Morgan Stanley
RSUs
Understanding RSUs, how to
determine whether you received an
RSU, restrictions, taxation
Investopedia
RSUs
Definitions of key phrases relating to
the meaning, statutes, advantages &
disadvantages of concepts
Investopedia
Phantom Stock
& SAR
Definitions of key phrases relating to
the meaning, advantages +
disadvantages
PhantomStock
Types of Plans
Types of Phantom Stock plans,
meanings, advantages, uses of each
type and related disadvantages
PhantomStock
Whitepaper
Definitions, types, uses, meanings,
advantages and disadvantages,who
uses what, when and how these work
Need
help?

8. SOMEHOTTERMS RESOURCES
GRANT
VESTING
EXERCISE
STRIKE PRICE
Issuing a stock option award to an employee usually read in
conjunction with his employment agreement and statutes
The time period that an
employee needs to wait for/
milestones which need to
be reached/ performance
that needs to be delivered
when the employee can
apply to receive the stock.
Vesting Schedule
Accelerated Vesting
Trigger Vesting
Cliff Vesting
Schedule of when what portion of
stock becomes eligible for exercise
Procedure for premature vesting in
situations such as buy-out/ merger
Single/ Double Trigger of sale +/-
employee exit that leads to vesting
Time period during which no
vesting happens till a certain date
Act of buying the stock unit
by paying the ‘Exercise
amount’, if any, to convert the
vested options to actual stock
Price that the option holder
pays in order to acquire the
stock units which he is
entitled to which is based on:
Exercise Period
Maturity
Time period when option holder
can apply to receive stock units
Period for which the Exercise
period stays open
ESOP Cheat
Sheet
Alexander Jarvis Blog 50
Folds on ESOP Terms
ESOP, The
Employers
Perspective
Cleartax Blog on Key terms in
ESOPs and what they mean
Regulators
& ESOPs in
India
Nishith Desai Associates
whitepaper on ESOP terms
Accion ESOP
Whitepaper
Best practices in ESOPs and
term used with examples
VALUE OF
INCENTIVE
AWARDED
AFFORDABILITY
TO EXERCISE
FMV OF THE
SECURITIES
Need
help?

9. Set up the
single line
objective
Analyse the
impact on
everyone
Establish the
legal
framework
Draft the
ESOP Scheme
& Rationale
Structure
Awards to
incentives
Communicate
the awards
right
Set up an ESOP
Committee with
members from Founding
team, KMP & HR
Obtain approval of
ESOP Committee of
Plan, Coverage and
Quantum
Obtain approval of
ESOP Committee
and Compensation
Committees

10. Set up the
single line
objective
Analyse the
impact on
everyone
Establish the
legal
framework
Draft the
ESOP Scheme
& Rationale
Structure
Awards to
incentives
Communicate
the awards
right
Set up an ESOP
Committee with
members from Founding
team, KMP & HR

11. BEINGOBJECTIVE
A simple
comprehensive
single sentence
objective
statement
A single sentence goal
statement allows all
stakeholders to be on the
same page as to why the
proposed plan is being setup
and who it wishes to reward/
incentivize. This ensures that
future stakeholders are also
in the know and aligned to
the long-term objective.
To encourage, motivate
and retain employees
contributing to the
overall management by
enabling ownership
while allowing them to
accrue personal wealth
and gain from the
growth of the company.
Structure is based on the goal of the plan,
e.g., retention as a key goal would define
length of vesting cycles/ encouraging
ownership would define the exercise price.
Defines the coverage
of employee levels of
the plan, e.g., senior
management only in
this case.
This is important to
decide on the type of
plan, e.g., using a
Phantom stock award
when ownership is
not the objective.
This allows to decide on the
quantum, tenure and conditions
for exercise, e.g., holding period
lengths before sale.
This defines the performance
goals that the plan may be
attached to, e.g., revenue goals,
investment goals or profit goals.

12. Set up the
single line
objective
Analyse the
impact on
everyone
Establish the
legal
framework
Draft the
ESOP Scheme
& Rationale
Structure
Awards to
incentives
Communicate
the awards
right

13. ANALYSE THE IMPACT
RESOURCES
The Hartford
Magazine on
ESOPs
ESOP factors to consider and the
next generation
Money Today,
How to use
ESOPs
ESOPs SOPs By Tanvi Verma
Business
Standard,
Using ESOPs
productively
Risky but profitably
ON THE COMPANY
ON THE EMPLOYEES
FINANCIAL
NON-FINANCIAL
Impact on future cash
flows, Ability to
compensate in cash, Tax
considerations at time of
exercise, Cost of setting
up and administration,
buy-back need, Valuation
expected over time
Value of incentives,
ability to afford exercise,
withholding tax
requirements, payoff at
exercise, salary-ESOP
trade-off, other benefits
provided
Potential for growth,
control in organization,
selection of the right
personnel for allotment,
timing of exercise,
alignment of incentives
to objectives/ plan
Timing of grant and plan,
right communication to
employees, management
perception of risk factors,
growth path visualized,
need to having loyalty
from team

14. Set up the
single line
objective
Analyse the
impact on
everyone
Establish the
legal
framework
Draft the
ESOP Scheme
& Rationale
Structure
Awards to
incentives
Communicate
the awards
right

15. EVALUATE
RESOURCES
SEBI
Regulations
on ESOPs
Employee stock option
scheme and employee
stock purchase scheme
guidelines, 1999
Changes in
Tax on ESOPs,
Forbes India
Changes in Tax Structure Will
Impact ESOPS
How ISOs are
taxed, The
Balance
Taxation and impact on ISOs in
US and under the tax reforms
ISO taxation
detailed,
TurboTax
Taxation and impact on ISOs in
US and under the tax reforms
Rule 701,
UpCounsel
Process, conditions to
be fulfilled for availing
safe harbour benefits
Authorisation for
granting of ESOPs
Sanction by Special
Resolution by the
Shareholders
Separate
Resolution
for Additional
issues to employees
Separate Resolution
for grants to parent,
subsidiary employees
Setting up the
scheme
Minimum Vesting
Period
of 1 year from grant
Decision on Lock-
in-period post
exercise
Transferability, -
Non-transferable, or
cannot be
encumbered
Determining the
Exercise Price
(accounting norms
and incentives)
Clarifying
exercise
Maintenance of
Registers
of Employee Stock
Grants, Exercise
Forfeiture/Refund on
expiry/ non-fulfilment
of vesting conditions
Exercise conditions,
process, legal heirs,
incapacity
Communicating
to stakeholders
Disclosures of the
Scheme
Framework -Execution
- Reporting
Variation from the
ESOS
Approval by special
resolution
Disclosures in BoD
Report
summary of movement &
financial impact
Need
help?

16. Set up the
single line
objective
Analyse the
impact on
everyone
Establish the
legal
framework
Draft the
ESOP Scheme
& Rationale
Structure
Awards to
incentives
Communicate
the awards
right
Obtain approval of
ESOP Committee of
Plan, Coverage and
Quantum

17. DECIDEAWARDS RESOURCES
ESOP Best
Practices,
Accion
Best practices, model
examples, terms and
calculators
Segment your
teams by
function/ role
Founding Team/
CXOs
Senior Team/
VPs & Above
Functional
Teams
Support
Teams1
Define
Rationale for
Awards
2 % ownership
Wealth
accretion
$ incentives $ incentives
Assign option
multiplier for
contribution
3 Negotiate
Negotiate
+ X times Base
Salary
X times
Base Salary
X times
Base Salary
Assign $ value
to stock
options
4
% holding at
maturity
X
Valuation at
maturity
X
Discounting factor
=
$ value of holding
$ value of holding
+
$ value of award
Base Salary
X
Option Multiplier
=
$ value of award
Base Salary
X
Option Multiplier
=
$ value of award
Compute
Awards
offered
5
% holding
X
Total Equity Units
=
# of equity units
# of equity units
of methods to left
& right
$ value of award
/ Last Base Value
discovered x Total
Equity Units =
# of equity units
$ value of award
/ Last Base Value
discovered x Total
Equity Units =
# of equity units
Co-founder
Equity
Calculator,
Foundrs
Objective way to assess
value of co-founders &
founding team
Co-founder
Equity Split,
Gust
Objective way to assess
value of co-founders &
founding team
Getting the
value of stock
options,
McKinsey
How to get the most of
your stock option pool
and awards

19. DRAFTASCHEME
Low
3m
Exercise
Period
Med
6m
High
12m
Vesting
Period
Most commonly
chosen by MSMEs
Low
0Y
Lock-in
Period
Med
1Y
High
4Y
Most commonly
chosen by MSMEs
Y1
30%
Award
Allocation
Y2
20%
Y3
20%
Y4
30%
Yes
40%
Buy-back
Option
No
60%
Most commonly
chosen by MSMEs
Tech
4Y
Serv
4Y
Manu
5Y
Other
5Y
Vesting
Frequency
Annual
70%
Quarterly
20%
Monthly
10%
Most commonly
chosen by MSMEs
Most trending
Need
help?

20. Set up the
single line
objective
Analyse the
impact on
everyone
Establish the
legal
framework
Draft the
ESOP Scheme
& Rationale
Structure
Awards to
incentives
Communicate
the awards
right
Obtain approval of
ESOP Committee
and Compensation
Committees

21. DECIDEAWARDS RESOURCES
ESOP Best
Practices,
Accion
Best practices, model
examples, terms and
calculators
Segment your
teams by
function/ role
Founding Team/
CXOs
Senior Team/
VPs & Above
Functional
Teams
Support
Teams1
Define
Rationale for
Awards
2 % ownership
Wealth
accretion
$ incentives $ incentives
Assign option
multiplier for
contribution
3 Negotiate
Negotiate
+ X times Base
Salary
X times
Base Salary
X times
Base Salary
Assign $ value
to stock
options
4
% holding at
maturity
X
Valuation at
maturity
X
Discounting factor
=
$ value of holding
$ value of holding
+
$ value of award
Base Salary
X
Option Multiplier
=
$ value of award
Base Salary
X
Option Multiplier
=
$ value of award
Compute
Awards
offered
5
% holding
X
Total Equity Units
=
# of equity units
# of equity units
of methods to left
& right
$ value of award
/ Last Base Value
discovered x Total
Equity Units =
# of equity units
$ value of award
/ Last Base Value
discovered x Total
Equity Units =
# of equity units
Co-founder
Equity
Calculator,
Foundrs
Objective way to assess
value of co-founders &
founding team
Co-founder
Equity Split,
Gust
Objective way to assess
value of co-founders &
founding team
Getting the
value of stock
options,
McKinsey
How to get the most of
your stock option pool
and awards

22. DECIDEAWARDS RESOURCES
ESOP Best
Practices,
Accion
Best practices, model
examples, terms and
calculators
Co-founder
Equity
Calculator,
Foundrs
Objective way to assess
value of co-founders &
founding team
Co-founder
Equity Split,
Gust
Objective way to assess
value of co-founders &
founding team
Getting the
value of stock
options,
McKinsey
Evaluate Co-
founder/ CXO
Equity Split
First 10
Employees
5-10%
Allocation
for Early
team
Next 20
Employees
5%
Next 50
Employees
5%
Next 100
Employees
5%
Mgmt
7%
Allocation by
function
Delivery/
Ops
5%
Sales/
Business
5%
Support
function
3%
Board
2%
CEO
2.5%
CTO/ CPO
1.5%
CFO
0.5%
CBO
1%
CMO
1%
CHR
0.5%
Size of
Option pool
by Industry
Knowledge Industries
Tech
25%
BFSI
16%
Services
18%
Others
16%
Asset Intensive
FMCG
17%
Manu
16%
Others
10%
Need
help?

23. Set up the
single line
objective
Analyse the
impact on
everyone
Establish the
legal
framework
Draft the
ESOP Scheme
& Rationale
Structure
Awards to
incentives
Communicate
the awards
right

24. $1.17
$2.51
$5.69
$10.26
16%
11%
9%
7%
0.00 %
2.00 %
4.00 %
6.00 %
8.00 %
10 .0 0%
12 .0 0%
14 .0 0%
16 .0 0%
18 .0 0%
$-
$2 .00
$4 .00
$6 .00
$8 .00
$1 0.00
$1 2.00
Value of ESOP
pool over
funding stages
EARLY
STAGE
Round Pre-A, A
EXPANSION
STAGE
Round B, C
LATE
STAGE
Series E, F, PIPE, IPO
SEED
STAGE
Round Angel, Seed
Amount in
Pool as % of
total equity

25. RIGHTMESSAGE
Award
Agreement
Grant
Information
Exercise
Process
Tax
Implication
Changes in
status/ tax/
notification
Option
Plan
RIGHTMEDIUM
most effective
most used
least effective
Video
Instructional
Written
Paper/ Email
Presented
Townhall
Written
Paper/ Email
Verbal
Written
Paper/ Email
Written
Paper
Written
Paper
Written
Email
Video
Instructional
Written
Paper/ Email
Online
Intranet
Presented
Townhall
Written
Email
Written
Email
Written
Paper/ Email
Written
Paper/ Email
Verbal
Online
Intranet
74% of the employees were dissatisfied with organizations’ measures to communicate.
- Ragan Survey, 2014

26. GREAT CASE STUDY
Starbucks’ communication of their stock option plan is right on. Clear, concise and friendly in demeanour. This
enables all employees to be clear and refer to it for any clarifications.
Communicating Grants
& Plan
Communicating Grant
Valuation
Communicating
Vesting & Exercise

27. Employees who believe that
management is concerned about
them as a whole person – not just an
employee – are more productive,
more satisfied, more fulfilled.
- Anne Mulcahy
Former Chairperson & CEO, Xerox Corporation

28. BONUSSECTION
Using Stock
Options to
dissuade Hostile
Takeovers
Using Stock
Options to Revive a
flailing company
Using Stock
Options to
Facilitate
Divestiture
Stock Options
causing financial
harm
Stock Options
leading to exit of
key employees
Stock Options
leading to
dissatisfaction
GOOD BAD
The
Economist
An ESOP To The Workers
RESOURCES RESOURCES
The Menke
Group
The Original History of the
ESOP and its role as a
business succession tool
Gene Marks
Inc.com, Is there a problem
with your ESOPs
Bloomberg
Why ESOPS are a Complete
Failure in India
The CS
Monitor
ESOP
gains as anti-takeover defence
Inc42
How ESOP exercise
conditions can cause overall
dissatisfaction

29. Now, can Prequate
help?
Of
course
management
strategic
ESOP
AUDIT
ESOP
SCHEME
GRANT
STRUCTURING
BENCHMARK
STUDY
REVENUE
AUGMENTATION
STUDY
ESOP
REVIEWS
ESOP
VALUE STUDY
30 days 90 days 180 days 360 days

30. There’s something else I wanted to check
with you guys on.
HELP ME EVALUATE MY ESOPs SEE WHAT ELSE WE CAN DO
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